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Tuesday, December 23, 2014

How U.S. Businesses Can Succeed in India in 2015

How U.S. Businesses Can Succeed in India in 2015

By Vijay Govindarajan and Gunjan
Bagla

DECEMBER
22, 2014

On January 26,
2015,
President Obama will become the first sitting U.S. President to visit India twice. Ahead of Indian Prime
Minister Narendra Modi’s visit to Washington last September, the U.S.-India
Business Council found that its large company members were prepared to invest
$40 billion into India by 2017. This at a time when
Brazil’s economy is stuttering, Vladimir Putin’s expansionism has made Russia a
pariah, and the rich world is looking for someone other than China to love. In
the hyperbole of online media, one headline reads, India is the last BRIC Standing.

The U.S.-India love first peaked in
July 2008 when India’s government of the time risked its
very survival in support of a nuclear energy deal led by Washington. But both trade and political
alignment lumbered slowly forward until the current quarter and many American
executives had become flustered with their India initiatives.

Until now.

Today there appears to a second gold
rush to India. Silicon Valley venture capitalist, Douglas Leone
of Sequoia Capital, told the Economic Times of India in October, “We could not
be more thrilled. We don’t have 25-30 category leaders in the United States; we don’t have [as many] in China right now, but we have it in India.” In the same month SoftBank of
Japan committed to investing $10 billion into India over the next several years and CEO
Masayoshi Son proved his seriousness by pouring the first billion into an
Indian e-commerce company (Snapdeal) and a car-sharing service (Olacabs).

It’s not just frothy internet
startups that are doing well in India today. Boeing India’s Dennis
Swanson told Business Week that he expects to sign a new strategic partnership
with an Indian company in 2015. Boeing is America’s largest exporter and the only
American defense contractor to have crossed $2 billion in sales to India. America’s largest insurer, Allstate,
announced plans to invest $1 billion in its India operations. Domino’s Pizza declared
that they sell more pies in India than any other country other than
the United States.

Federal and state government
officials have also lined up to promote their respective causes in New Delhi, from Commerce Secretary Penny
Pritzker, to South Carolina Governor Nikki Haley. Hundreds of lesser known
companies, organizations and officials have joined the scramble. And we expect
that President Obama’s visit will spark a further acceleration of business
interest in India.

While some companies will do very
well in India, we expect many others to be
disappointed. But it won’t be “India’s fault,” in our view. In June
2013, Dallas-based Mary Kay exited from India after six years and over $20
million invested. At the same time Amway and L’Oreal thrived in the same market
and personal care sales boomed across most of India. Earlier, GE found that it could
not make a go in the appliance business in India.

Abbott Laboratories of Illinois
acquired Piramal Healthcare Ltd.’s branded generic-medicine unit in India for $3.7 billion in 2010,
predicting it would grow at 20% a year for a decade. Two years later sales were
stagnant in dollar terms.

We believe that American companies
have a huge upside in India over the next several years. But
they need to be alert to the following four signposts.

Choose the right India country manager: The role of
country manager for India can mean many things depending on
the scope of operations and the structure of an organization. First of all,
headquarters needs to be clear about their vision of their role in India over the next 2-5 years and recruit
to match that vision.

Sometimes, we see companies enter
India with an executive who is the rough equivalent of a regional sales manager
in the United States when their visions of India are much grander; he or she is
typically not empowered to seize transformational opportunities in India while
at the same time, his or her voice is not heard loudly enough at global
headquarters. We’ve also seen the reverse, where a retained search firm
convinces an American company with very modest goals for India to hire a leader used to running a
thousand-person organization. In India’s class-conscious culture, such a
person might struggle at having to personally perform tasks that they routinely
delegated two or three layers down. They will definitely find themselves
under-challenged. When they quit, the American company’s brand and reputation
takes a hit in India.

We cringe at hiring processes that
emphasize the ability to “communicate effectively with headquarters” over the
skill of dealing with Indian companies and government officials. Of course it
would be ideal to hire a manager who is equally adept in Peoria and Pune, but there is a paucity of
such talent in a growing emerging market. While India is complex, it is an open society
and an expatriate sent to India can learn to be effective in India, provided they have an open mind, a
sense of humility, and the tenacity to manage the Indian operation for four
years or more. David Mulford, U.S. Ambassador to India from 2004 to 2009, was more
successful in part because his long tenure enabled him to gain trust, respect
and apply his learning effectively. Many other recent ambassadors have returned
to Washington in two years or less.

Prepare to adapt: Muhtar Kent, the
Turkish-American CEO of the Coca-Cola Company, lived in India as a boy and now oversees a
business where India is a top 10 market in terms of volume,
and where his company is investing another $5 billion. “… In India, appearances can be deceiving,” he
wrote earlier this year in an essay in Re-Imagining India. “For outsiders there
is always a hint of mystery. Even if you live and work there, you can never be
entirely sure you understand. It is best to assume that you do not. If you come
to India with some grand, pre-determined
strategy or master plan, prepare to be distracted, deterred, even demoralized.”

While flexibility is important in
any new market, India stretches the assumptions and
belief systems of many seasoned international business people. If you and your
company are not prepared to be humble and open about dealing with India, it may be best to stay home. We
don’t mean to suggest that you compromise your integrity or core values or that
you tolerate any corruption, but be ready to do things in India that you may not need to do in
other markets. Kent goes on to say that the key to
their success in India “has been learning to see the
Indian market as it is, not as we wished it to be.”

In our conversations, we hear this
yearning to see the Indian markets as American executives “wish it to be” from
the trivial to the substantial:

• “Why can’t Indian Standard Time be
nine or 10 hours ahead of EST? What is this business about nine and a half
hours?”

• “What is a crore of rupees? Why
can’t they count in millions and billions like everyone else?”

• “Why are there so many levels of
duties, taxes and “cesses” in India?”

• “Reserve Bank permission? I never
have to deal with the U.S. Federal Reserve, what is this all about?”

• “I have one distributor for all of
Australia. Why do I need five in India?”

Take India as it is and you can learn to
thrive. Complaining about why it is different will gain neither friends nor
sales.

Value, not price: The common wisdom
is that India’s buyers seek the lowest possible
price and are prepared to compromise on quality. And rarely is an American
product or service the low-price leader in India’s market. Add up Indian taxes and
channel costs and the price of American products looks worse compared to a
local player.

The reality is that usage
assumptions of many imported products are not attuned to the Indian market. For
example, interest rates are higher in India than the USA and credit is not easy to come by.
So cash flow is king in most Indian businesses and if you can document how your
product or service can improve your Indian customer’s cash flow, a high ticket
price becomes much less of a factor. In the United States, a machine may be used six hours a
day for five days a week. An Indian executive may want to buy the same machine
and run it 16 hours a day for six or seven days a week. Low-cost Indian repair
and maintenance crews can tune up the equipment at night.

American equipment is often sold
bundled with a host of features, accessories and services that may have no
relevance to the market in India. Many times, the product can be
un-bundled thoughtfully and the final configuration offered in India may not be lower cost but can
preserve or even improve gross margins.

Don’t ignore governments as a
customer: Other than in the defense sector, American companies have generally
hesitated to engage with India’s government, fearing corruption,
long sales cycles and the pressure of a low-bid tender process. Today, however,
there is opportunity in government sales.

India has 29 state governments in
addition to the union (central or federal) government. Some of the states and
their cities have more nimble and forward-thinking officials who are committed
to modernization and rapid growth and they should no longer be ignored by new
entrants.

These sales are decided in state
capitals across the country and most American companies should choose no more
than four states as initial targets. Buoyed by economic growth, New Delhi also has a lot of money to invest
in infrastructure, in medical services, in technology and more. By March 2015,
the Modi government will announce its new budget for fiscal year 2014-2015 and
this will affect many policies and procedure followed by the central
government. This will be a good time to re-assess whether India’s federal government will be a more
promising market for foreign companies.

With Obama’s upcoming visit, we
expect the conditions for U.S.-India activity to continue to be favorable. If
you’re not rethinking your India goals, now is a good time to do so.

Gunjan Baglais Managing Director of Amritt Inc, a California consultancy that advises American companies on doing
business in India and the author of Doing Business in 21st Century India (Hachette, 2008).